A week ago, investors were scoffing at the idea that small caps and value stocks might have a genuine summer rally. This has been tried before in the last few years, and it has always ended in tears. One week later, and the trend clearly has some legs. Money has been moving mostly out of tech for more than a week and into small-cap and value stocks, which are often industrials, materials and some financials. The S & P 500 Value ETF (IVE) , which holds stocks like Berkshire Hathaway , JP Morgan , Exxon Mobil and Johnson & Johnson , finally hit a new high after lagging the tech-dominated S & P 500 Growth ETF (IVW) for more than a year. “The BIG question is whether this is truly rotational or just a trade on interest rates (rate cuts = small cap rally is out there as a narrative in multiple venues),” ETF journalist and financial futurist Dave Nadig told me. “If it works for more than a few days, I suspect the [‘fear of missing out’ crowd] will start heaving money into products like the Avantis Small Cap Value ETF (AVUV).” The rather sudden move into small caps and value has already led to outsized moves in a number of exchange-traded funds. Small-cap and value ETFs in July SPDR Portfolio S & P 600 Small Cap ETF (SPSM) + 9% SPDR Portfolio S & P 400 Mid Cap ETF (SPMD) + 7% SPDR Portfolio S & P 500 Value ETF (SPYV) + 4% With the S & P up 3.8% this month, these are not blowout moves but outperformance from these sectors has been so rare it is enough to attract momentum traders. But these are the most obvious moves. Unsurprisingly, some investors are seeking to capitalize on the moves in novel ways. How to play this rotation in a single ETF The game is how to play the market, ex-mega caps, in a single investment. One example: the Vanguard Extended Market ETF (VXF). This fund holds the entire stock market, minus the S & P 500. Sounds weird, right? But it might be the perfect ETF for this market. It takes the S & P Total Market Index, which is the entire investable equity universe in the United States (we are talking over 3,000 stocks), and takes out the S & P 500. The resulting portfolio consists of everything from mid-caps to micro-caps and, with an expense ratio of just six basis points (0.06%), is among the cheaper ETFs to play such broad exposure. It’s up about 8% in the last week, to a two-and-a-half-year high. VXF 1M mountain Vanguard Extended Market ETF over the past month. Other little-noticed corners of the market that make similar but not identical calls include the iShares Russell 2500 ETF (SMMD), which tracks the Russell 2000 plus 500 more stocks that go into the micro-cap space, also up 8% in the last week. Or take the Hilton Small-MidCap Opportunity ETF (SMCO), an actively managed value fund that makes more concentrated bets in the small-cap space (the top 10 stocks are 25% of the fund), up about 6% in the last week. This trend of buying small caps and value is clearly more than a one-day wonder: It’s now a one-week wonder. There’s an old saying among the flow traders that flows aren’t necessarily a signal, meaning you have to be careful extrapolating short-term movements, particularly in ETFs. Still, what we have seen so far is already attracting the momentum people. Next step: Let’s see if it lasts through the summer.
